What is the Common Element?
By Arnold Kling
Steve Randy Waldman writes,
I think of government, education, health care, and finance collectively as the “information asymmetry industry”, and I find it terrifying that many people presume that they are the future growth industries for the United States.
Waldman has other interesting things to say as well. His post is a response to Tyler Cowen’s The Great Stagnation.
The information asymmetry is that the sellers know what they are selling much better than the buyers know what they are buying. However, I do not think this is what distinguishes those four industries. There are plenty of other situations of information asymmetry, including buying a house, buying a car, or buying a piece of electronic equipment.
I think what distinguishes these four industries is that the sellers themselves know less than what people expect. Educators do not know what, if anything, actually adds value. For all we know, test scores are determined by the backgrounds (mostly genetic) of the students, with remaining differences that are random and irreproducible.
People have unrealistically high hopes and expectations for education, health care, financial services, and government. Studies by economists tend to raise doubts about the validity of those hopes: educational experiments almost never show a durable, reproducible gain; as Robin Hanson emphasizes, health care economics is notorious for cross-sectional studies showing that more care does not lead to better outcomes; money managers perform worse than index funds; and government’s failures are well documented.
Two speculative remarks:
1. Robin Hanson talks about a future in which most of the value is embedded in capital, so that workers are unable to earn a decent living. Maybe that future is closer than we think.I believe it was Gregory Clark who said that the industrial revolution displaced the horse. That was true of 19th-century innovations (plus the car). But perhaps the more recent trend is for innovations to displace human workers.
2. The total work effort needed to provide the material goods people need has fallen considerably. Perhaps the most economically logical response is to consume more leisure. However, we resist that. Instead, we try to engineer a society in which most people still work much of the time. Education, health care, government, and financial services play the role of make-work industries.